Gold prices fall into negative territory as the Federal Reserve sees the final interest rate higher than 4.5% in 2023
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(Kitco News) – The gold market is under pressure to fall below critical long-term support at $1,675 an ounce as the Federal Reserve raises the Fed funds rate by another 75 basis points and signals that more aggressive price increases will continue through the end of the year.
The rate hike was largely expected as the US central bank was clear that its current priority was to slow the economy to calm persistent inflation pressures.
Looking beyond today’s monetary policy decision, updated economists’ forecasts show that the central bank sees significantly higher rates through 2024. The Federal Reserve’s interest rate projection, also known as the point chart, points to the fed funds rate rising to 4.4% by the end of this year, up from the previous estimate of 3.4%.
Looking to 2023, the fed funds rate is expected to rise to 4.6%, up from the June estimate of 3.8%. Interest rates for 2024 are expected to come in at 3.9%, up from the June forecast of 3.4%. At first sight in 2025, the Fed sees interest rates rise 2.9%, which is slightly higher than the expected long-term rate of 2.5%.
Adam Patton, chief currency strategist for Forexlive.com, notes that the final interest rate at 4.6% is much higher than what the markets had previously expected, looking for a peak of around 4%. He added that the hawkish bias of expectations pushed the US dollar to a 20-year high.
Despite a strong start to the day, the gold market was not able to withstand the ongoing selling pressure ahead of the US central bank’s monetary policy decision. December gold futures were trading at $1,668 an ounce, down 0.18% on the day.
Coupled with further monetary policy tightening, the central bank’s updated economic forecasts show rising inflation pressures and lower growth through 2024.
The US central bank now sees the US economy growing 0.2% this year, down from the June forecast of 1.7%. The global distribution of oil in the United States is expected to increase to 1.2% in 2023, down from the previous estimate of 1.7%. The economic growth rate for 2024 was also reduced to 1.7%, compared to the previous estimate of 1.9%. For 2025, the central bank expects GDP growth of 1.8%.
At the same time, inflation expectations continue to rise. The US central bank expects core inflation, which excludes volatile food and energy prices, to rise 4.5% this year compared to its June estimate of 4.3%. Core inflation will remain high at 3.1% in 2023 compared to the previous forecast of 2.7%. Looking into 2024, core consumer prices are expected to rise 2.3%, unchanged from the June forecast. Core inflation is expected to decline to 2.1% by 20254.
Overall consumer prices are expected to rise 5.4% this year, up from a June forecast of 5.2%. Next year, the general inflation rate is expected to rise to 2.8%, up from the previous estimate of 2.6%. By 2024, inflation is expected to rise by 2.3%, which is higher than the previous forecast of 2.2%. Consumer prices are expected to increase by 2.1% in 2025.
The Fed continues to see a fairly stable job market in the next three years, with the unemployment rate rising to 3.8% this year, up from a June forecast of 3.7%. The unemployment rate is expected to rise and stabilize at 4.4% in 2023 and 2024, up from previous estimates of 3.9 and 4.1%, respectively. 3.5%. In 2025, the unemployment rate is expected to rise by 4.3%.
“The outlook for interest rates and economic variables shows that participants now believe that higher rates and approaching stagnation will be necessary to bring inflation down to the 2% target,” said Andrew Grantham, chief economist at CIBC.
Michael Pierce, chief US economist noted that the updated forecast is very optimistic as the central bank sees another 75 basis point increase and a 50 basis point hike in November and December.
The Fed believes it will need to raise interest rates a bit more and see economic growth weaken more than previously thought to bring core inflation back to near the 2.0% target over the next two to three years. In turn, continued Fed tightening suggests that we will need to revise our Fed funds rate forecast above the 4.00-4.25% peak we have currently set, which will increase downside risks to growth as well, Pierce said. .
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